infoTECH News

[July 31, 2014]

Telef�nica Achieves a Net Profit of 1,903 Million Euros in the First Semester of the Year and Confirms Its Operating and Financial Targets for 2014

MADRID --(Business Wire)--

The company accelerated its commercial activity in Spain, where the
radical transformation undertaken in recent years and the improvement in
the economic conditions should reflect in a gradual revenue improvement
in the coming quarters. Telef�nica's (News - Alert) Executive Chairman, C�sar Alierta,
said: "first-half results started to reflect the benefits from the
investments in network modernisation carried out in recent quarters,
which are enabling us to further differentiate our offering in key
markets."

Revenue in the first semester of the year
increased by 1.4% in organic terms, to 24,957 million euros. In the
second quarter, revenue grew 1.3% organically and showed the
acceleration of revenue growth in mobile data (+9.2% organic) and
non-SMS data (24.1%).

The company has also made a significant
commercial effort in order to capture new growth opportunities:OIBDA
reached 8,055 million euros in the period January-June and remained
stable compared to recent quarters (-0.1% organic year-on-year in the
semester).

First semester results are affected by exchange
rate variations, which subtract 10.9 p.p from year-on-year
growth of revenue and OIBDA. They are also affected by changes
in the perimeter, particularly by the sale of Telefonica (News - Alert) Czech
Republic, which reduced revenue by 3.1 p.p. and OIBDA by 3.7 p.p.

Telef�nica continues to focus on technological transformation and
modernisation of its networks, which translates into a significant
increase in investment; this amounted to 3,523 million euros
(+27.2% organic) in the first half of the year.

Free cash flow grew significantly in the
first half of the year to 1,664 million euros (+14.7%) and
consequently the company's financial flexibility also improved.
Similarly, net financial debt fell by
1,590 million euros in the semester. Including the sale of Telefonica
Ireland, completed on the 15th of July, net debt stood at
42,961 million euros.

In Spain, consolidation of revenue
together with a radical change of commercial activity is the basis of
the change in business dynamics in Spain. The results for the second
quarter confirm the success of the new commercial offering and
therefore, of the increase of sales in high value services, as shown
by the net gain of 0.6 million in pay TV customers and the net
quarterly gain in fibre, of 182,000 access. At the end of the quarter,
fibre coverage stood at 7.4 million premises, almost double the figure
in June 2013.

Telef�nica Brazil, which for the fourth
consecutive quarter has captured more than 60% of net gains in the
contract market, continues to improve its competitive position, thanks
to its quality of service improvement strategy and its commitment to
innovation in its commercial proposals.

In the first six months of 2014 Telef�nica further progressed in its
transformation towards a more sustainable business model, with lower
customer churn and leveraged on higher quality services. This strategy
resulted in customer value increase, both in average lifetime extension
and ARPU improvement. Thus, C�sar Alierta, Executive Chairman of
Telefonica, explained how the acceleration of the commercial activity in
the second quarter reflects the offering differentiation in Telefonica's
key markets "with net additions of 2 million mobile contracts, 5
million smartphones and more than six hundred thousand pay TV customers.
All of which are high-value services contributing to boost average
revenue per customer and reduce churn". He also said that Telefonica "continued
to strengthen its competitive position through higher investments which
resulted in 10.5 million premises passed with fibre and an expansion of
LTE (News - Alert) coverage to almost half of the population in our European markets
and one third of the population in Latin America".

Commercial activity in high value segments and services was particularly
noteworthy and gradually flowed into revenues, which continued to
deliver organic growth. OIBDA remained stable despite higher commercial
expenses, which are the cornerstone of future growth, thanks to strict
cost control and operational simplification. In addition, the solid cash
flow generation in the first half along with portfolio management
optimisation policy, allowed further financial flexibility improvement.
C�sar Alierta also highlighted: "we continued executing our asset
portfolio optimisation policy, enabling us to reduce debt to below 43
billion euros including the disposal of Ireland, completed in July".

315 million total accesses

Total accesses grew 2% year-on-year in organic terms to 315.8
million as of June 30th (excluding T. Czech Republic following its sale
on 1 January) thanks to the increased commercial intensity in the last
three months. Once again, growth was driven on the one hand by higher
value segments and growth levers, such as mobile contract segment
(especially smartphones), pay TV and fibre, and on the other hand by T.
Hispanoam�rica and T. Brasil. Moreover, ongoing investment efforts
resulted in 10.5 million premises passed with fibre and increased
adoption of LTE services. This increasing differentiation of service
quality translated into higher customer satisfaction, reflected in
quarter-on-quarter improvement of total churn (-0.3 percentage points)
which posted better performance across diferent services.

The pace of fibre deployment over the last three months significantly
accelerated to reach 1.3 thousand premises passed (848 thousand in the
first quarter). At the end of the quarter, fibre coverage stood at 7.4
million premises (5.0 million households), almost double the figure in
June 2013, thanks to an intense commercial activity in Spain and the
improvement in the economic condition.

In the first half of 2014 exchange rate year-on-year evolution
negatively impacted financial results, in particular the depreciations
of the Brazilian real and the Argentine peso along with the implicit
devaluation of the Venezuelan bolivar following the introduction of the
new exchange rate mechanism (SICAD I), although this impact eased
slightly in the second quarter. Thus, in the January-June period,
exchange rates reduced year-on-year revenue and OIBDA growth by 10.9
percentage points (-10.0 percentage points in the second quarter, from
both revenue and OIBDA).

This way, changes in the perimeter of consolidation (deconsolidation of
Telef�nica Czech Republic), reduced year-on-year revenue growth in the
first half of 2014 by 3.1 percentage points (-3.0 percentage points in
the second quarter) and year-on-year OIBDA growth by 3.7 percentage
points in both the first half and the second quarter of 2014.

Revenues totalled 24,957 million euros in January-June 2014,
12.6% lower year-on-year (-11.8% in the second quarter), impacted by the
abovementioned exchange rate fluctuations and changes in the
consolidation perimeter. In organic terms, revenues posted positive
growth for the fifth quarter in a row (+1.3% in the second quarter;
+1.4% in the first half), driven by the strong growth of T.
Hispanoam�rica (+11.3% in April-June; +13.0% in January-June) and mobile
data. Excluding the negative impact of regulation, organic revenues grew
3.6% compared with the first half of 2013 (+3.7% year-on-year in the
second quarter).

Mobile data revenue growth accelerated year-on-year in organic terms for
the second consecutive quarter (+9.2% in the second; +8.8% in the first;
+7.8% in the fourth quarter of 2013). In the first half of 2014, these
revenues grew 9.0% year-on-year in organic terms and already accounted
for 40% of mobile service revenues, 3 percentage points higher than the
same period of 2013. Non-SMS data revenue performance was particularly
noteworthy, with year-on-year growth improving to 23.8% in organic terms
in the first half (+24.1% in the quarter) and already accounting for 72%
of total data revenues (+9 percentage points year-on-year).

Consolidated operating expenses totalled 17,427 million euros in
the first half, 11.9% lower year-on-year (-10.8% in the quarter). In
organic terms, operating expenses rose 1.6% in the first six months
(+1.7% in the quarter) mainly due to higher commercial and network and
systems costs.

Operating income before depreciation and amortisation (OIBDA) in
the first half amounted to 8,055 million euros, 14.5% lower year-on-year
impacted by the already mentioned exchange rate fluctuations and changes
in the consolidation perimeter. In organic terms, OIBDA remained
virtually stable compared with January-June 2013 (-0.1%). In the second
quarter, OIBDA fell 0.7% year-on-year in organic terms (-15.0%
reported), mainly due to the increased commercial momentum and activity
focused on capturing growth opportunities. Excluding the negative impact
of regulation, OIBDA grew by 1.4% compared with January-June 2013 in
organic terms. OIBDA margin stood at 32.3% in the first half of
2014, with limited erosion in organic terms (-0.5 percentage points). In
the second quarter the margin stood at 32.4% (-0.6 percentage points
year-on-year in organic terms).

Operating income (OI) totalled 3,892 million euros in the
January-June period, 7.9% higher year-on-year in organic terms. In the
second quarter, OI advanced 10.4% year-on-year in organic terms to 2,055
million euros.

As a result, consolidated net income in the first half amounted
to 1,903 million euros, 7.5% lower year-on-year, and basic earnings per
share amounted to 0.41 euros (-11.0% year-on-year). However, in the
second quarter net income increased 4.9% year-on-year to 1,210 million
euros (affected in 291 million euros by the aforementioned revaluation
of deferred taxes) and basic earnings per share stood at 0.26 euros
(+2.0% year-on-year).

Technological transformation and network modernisation

With regards to investment, the Company continued focused on
technological transformation and network modernisation, with over 71% of
total investment devoted to business transformation and growth. CapEx
grew 27.2% year-on-year in organic terms (-9.8% reported) in the first
six months and totalled 3,523 million euros. It is important to note
that CapEx included 189 million euros relating to spectrum acquisition
in the first half of 2014, primarily in Colombia and Central America
(834 million euros in the first half of 2013, mainly in the UK, Spain,
Brazil and Uruguay).

Net financial debt stood at 43,791 million euros at the end of
June 2014, down 6,002 million euros year-on-year and 1,590 million euros
in the last six months. However, debt rose by 1,067 million euros in the
second quarter, mainly as a result of the payment of a dividend of 0.40
euros per share in May. Including post-closing events (sale of T.
Ireland), debt stood at 42,961 million euros. The leverage ratio (net
debt over OIBDA) for the last 12 months stood at 2.47 times at the end
of June 2014, and at 2.43 times including post-closing transactions
(disposal of T. Ireland).

In the first half of 2014, Telef�nica's financing activity
through bond and loan markets stood at around 9,880 million equivalent
euros. This activity was mainly focused on strengthening the liquidity
position, actively managing the cost of debt and smoothing the debt
maturity profile of Telef�nica S.A. for the following years. Therefore,
as of the end of June, the Group maintains a comfortable liquidity
position to accommodate the next debt maturities. In Hispanoam�rica,
Telef�nica's subsidiaries tapped financing markets for approximately 151
million equivalent euros in the January-June period. Also noteworthy is
the 500 million euro bond placement by T. Deutschland in January.

Digital Services and Telefonica Global Resources

The area of the CCDO ("Chief Commercial Digital Officer")
continued focused on bringing digital services at the core of our
customers' offer. The key advances during the second quarter are as
follows: In the Corporate (B2B) area, M2M
revenues maintained a good performance, rising more than 50%
year-on-year in organic terms on the back of the growth in M2M accesses
(+16% year-on-year) following several special projects secured in the
first half.

Revenues from the Cloud business continued growing at double digit rate,
above 20% year-on-year in organic terms in the first six months of the
year. Regarding Information Security, Telef�nica signed an agreement
with Etisalat (News - Alert) that will enable both companies to collaborate in the
development and implementation of a SOC (Security Operation Center) in
the United Arab Emirates.

In the Consumer area, the good performance
of the Video business stands out, with revenue growth in the first half
accelerating to above 15% in organic terms, boosted by the solid access
growth (+32% organic year-on-year), and with significant progress in
both Spain and Brazil (+91% and +28%, respectively). During this quarter
Telef�nica also acquired the exclusive rights in Spain for Euro 2016
qualifiers and 2018 World Cup. These new exclusive rights, together with
those secured previously for Roland Garros, Moto GP and Formula 1, makes
the Company's sport offer the most complete in the Spanish market.

Especially noteworthy in the Financial Services
area was the launch of the customer loyalty community "Yaap
Shopping" through the joint venture with CaixaBank and Santander.

The Global Device Management area continued
to drive smartphone adoption with a special focus on LTE. Thus, 74% of
total devices acquired in the second quarter were smartphones, with the
total volume of LTE devices bought by the Group increasing by 8 times
year-on-year.

Telef�nica Global Resources continues to drive the Company's
technological transformation, accelerating the rollout of ultra
broadband (UBB) infrastructure, in line with the targets set for the
year, ensuring better network quality and helping businesses
transformation, with IT as a key enabler. In parallel, the Company
continued progressing with the development of initiatives aimed at
increasing efficiency.

The global Network and Operations unit
advanced with the UBB rollout, reaching 10.5 million premises passed
with fibre at the end of the quarter (1.9 times more than in June 2013),
surpassing the 13,500 base stations with LTE (5 times more year-on-year)
and with over 80% of 3G and LTE base stations connected at high speed to
the transmission network.

Thus, the Company is prepared for the material data traffic growth in
the network (+35% year-on-year in the second quarter), driven both by
mobile broadband (+47% year-on-year) and fixed broadband traffic (+34%
year-on-year).

The global IT unit, business transformation
enabler, is focused on automation, standardisation, reutilisation and
modernisation as common principles. In this regard, it should be
highlighted the launch of business support systems in some
Hispanoamerica countries as well as the development of new online
capabilities (e.g. real-time contextual marketing campaign tools, portal
renewals with public and restricted access, new electronic self-service
channels in stores and via mobile devices, etc.).

Additionally, shared IT services were also used to progress towards
doing things once, unlocking efficiencies and quality improvements
benefiting from scale. Especially noteworthy is the Group-wide
availability of a new KPI "Global PKI" service that allows digital
certificates issuance, improving information security management on
infrastructures.

Finally, further progress was achieved towards the goals set for
infrastructure consolidation and applications transformation, with a 6%
reduction in physical servers in the first half of 2014, eliminating
more than 160 applications and at the same time, growing virtualised
servers to 38%.

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